8 pt The following information is for X Company\'s two products, A and B: Produc

Question

8 pt The following information is for X Company's two products, A and B: Product A Product B Revenue Total contribution margin Total fixed costs Profit $91,000 37,310 52,400 15,090 $88,000 37,840 24,950 $12,890 S- $31,440 of Product A's fixed costs are avoidable; $13,972 of Product B's fixed costs are avoidable. X Company plans to drop Product A since it shows a loss and increase sales of Product B by $27,900. Accompanying the sales increase will be a fixed cost increase of $4,400. If X Company drops Product A and increases Product B sales, what will be the effect on firm profits? 7, AO $1,727 BOS2,297 CO s3,055 DO $1,063 EO ss,404 FO s7187 8 pt X Company currently makes 6,000 units of a component part each year, but is considering buying it from a supplier for .40 each. The current annual cost of making the part is $54,900. The supplier wants X Company to sign a contract for the next six years. If X Company buys the part, it will be able to sell the equipment that it currently uses to make the part for $12,000, but the equipment will have no salvage value at the end of six years. Assuming a discount rate of 3%, what is the net present value of buying the part instead of making it? 8. AO $19,744 BO $22,310 CO $25,211 DO $28,488 EO $32,192 F $36,376

Explanation / Answer

Problem 7

Solution:

Effect on Profits for dropping Product A and increases the quantity of Product B

Saving in Fixed Cost from Product A if dropped

$31,440

Less: Total Contribution Loss from Product A if dropped

($37,310)

Net Loss from Product A

($5,870)

Add: Increase in Contribution Margin from Product B (37,840 / 88,000* 27,900)

11997

Less: Fixed Cost Increase if Product B increased

($4,400)

Total Profit by dropping Product A

$1,727

The firms profit will increase by $1,727 by dropping Product A and increasing Product B.

The correct option is A. $1,727

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Saving in Fixed Cost from Product A if dropped

$31,440

Less: Total Contribution Loss from Product A if dropped

($37,310)

Net Loss from Product A

($5,870)

Add: Increase in Contribution Margin from Product B (37,840 / 88,000* 27,900)

11997

Less: Fixed Cost Increase if Product B increased

($4,400)

Total Profit by dropping Product A

$1,727

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